Momentum trading involves buying past winners and selling past losers: It sounds too easy to be worth doing.
In a well-functioning stock market, it should be impossible to make consistent profits from such a simple system. But new research reveals large potential gains from momentum trading.
The research appears in the 2008 edition of the ABN AMRO Global Investment Returns Yearbook. The Yearbook is the most comprehensive and authoritative work of its kind. It analyses total returns since 1900 for stocks, bonds, cash, foreign exchange and inflation in 17 major markets, covering North America, Asia, Europe and Africa.
In this year’s report the authors-Elroy Dimson, Paul Marsh and Mike Staunton, of London Business School-study all 17 stock markets to update the international evidence on momentum. And in a completely new investigation, they go back to 1900 to see whether momentum worked in a previously unresearched era.
“Though costly to implement on a stand-alone basis, all investors need to be acutely aware of momentum. Even if they do not set out to exploit it, momentum is likely to be an important determinant of their performance,” the authors include.
“In the property market, banks and house-builders contribute to the cyclicality of real estate, and this exacerbates the momentum effect. Timing is everything in these markets,” says Rolf Elgeti, former head of Equity Strategy, ABN AMRO.
“ABN AMRO’s continuing commitment to this collaboration stems from a belief that the global returns database, with its high data integrity and unmatched breadth and historical perspective, creates an opportunity for creative and profitable analysis which is of exceptional interest to a broad range of investors,” adds Robert Bate, head of European Research, ABN AMRO.
The 2008 Yearbook provides a huge range of financial market information. In Chapter 1, the authors analyse the performance of global markets over 2007 and over the first eight years of the decade, highlighting what happened and why. In Chapter 2, they provide a comprehensive update on the long-term record of stocks, bonds, bills, inflation, currencies and risk premia around the world.
There are individual chapters for each country and the world index. The book provides a detailed record of performance from the main asset classes, cumulatively since 1900. For every country there is a statistical summary of long-term risk and return; tables of performance over periods of 10-108 years for ten asset classes and risk premia; graphs of annual and cumulative performance; measures of the dispersion of stock and bond returns over any investment horizon; and cumulative index values from 1900.